The Implications of Cuts in Saudi Arabia’s Oil Production and Exports

In the light of $100 oil, Saudi Arabia, the world’s largest oil producer and exporter has reportedly cut production.

The CNBC reports,

The world’s top oil exporter, Saudi Arabia, appears to have cut both its oil production and export in December, according to the latest update by the Joint Organizations Data Initiative (JODI), an official source of oil production, consumption and export data.

The OPEC heavyweight saw production decline by 237,000 barrels per day (bpd) from three-decade highs of 10.047 million bpd in November, the JODI data showed on Sunday.

The draw-down was sharper for the actual amount exported, declining by 440,000 bpd, or 5.6 percent, to come in at 7.364 million bpd, the data also showed. The level would still be similar to exports after a steep ramp-up last June.

In its monthly report on February 10, the IEA put Saudi Arabia’s production number for December slightly lower at 9.55 million bpd, a disparity of 260,000 bpd versus the JODI data.

The actions of the Saudi Arabian government have profound implications.

Could it be that Saudi Arabia has been responding to the threat of Shale oil revolution? Recently Saudi halted a planned $100 billion expansion of productive capacity.

And considering that Saudi’s fiscal budget breakeven level stands at an equivalent of $90 oil, with current prices only marginally above the critical threshold, Saudi’s political stewards seem to anxiously sense of the growing risks to political stability or a threat to their grip on power. Hence the move to reduce oil production aimed at the preservation of the status quo or the incumbent welfare state.

Chart from Energy Insights

It could also be that Saudi’s reserve and production may also have reached a “peak”.

Last year, Wikileaks reported that cable correspondence by key officials from Saudi Arabia suggested that the kingdom may have bloated their estimated reserves by nearly 40%. Thus cuts in exports and production have merely been exposing the chicanery of oil politics.

The bottom line is that Saudi Arabia seems desperate to see higher oil prices.

So aside from production cuts, the bias for inflationary policies, the other alternative would be to promote a war on Iran using the obsession “with the need to prevent Iran getting nuclear weapons” as cover. The same applies to other autocratic Middle East oil producing welfare states.

Thus political languages conveyed by political authorities can be deceiving as they may not reflect on the realities intended.

As George Orwell warned,

Political language is designed to make lies sound truthful and murder respectable, and to give an appearance of solidity to pure wind